Trade deficit trends
- March 25, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Trade deficit trends
Section: External Sector
Trade deficit already hit $188.2 billion as of March 21 this fiscal. At this rate, it’s expected to touch 19% of overall goods trade in FY22, compared with a record 24% in FY13, 23% in FY12 and 20.5% in the pre-pandemic year of FY20
Reasons for trade deficit
- Post covid demand recovery
- Supply chain disruption due to covid
- Rise in logistics and shipping cost
- Ukraine crisis and economic sanctions
- Imported inflation and currency depreciation
Trade deficit trends?
India’s merchandise imports jumped to a record $589 billion owing to the rising oil prices, while exports till March 21 stood at $400.8 billion. Thus, meeting the export target of 2021-22 in seven days’ advance.
|Balance of Payments
Balance of Payments (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
For preparing BoP accounts, economic transactions between a country and the rest of the world are grouped under – Current account, Capital account and Errors and Omissions. It also shows changes in Foreign Exchange Reserves.
Current Account: It shows export and import of visibles (also called merchandise or goods – represent trade balance) and invisibles (also called non-merchandise). Invisibles include services, transfers and income.
The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part of ‘Current Account Balance’.
A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
Capital Account: It shows a capital expenditure and income for a country.
It gives a summary of the net flow of both private and public investment into an economy.
External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a part of capital account.
Errors and Omissions: Sometimes the balance of payments does not balance. This imbalance is shown in the BoP as errors and omissions. It reflects the country’s inability to record all international transactions accurately.
Changes in Foreign Exchange Reserves: Movements in the reserves comprises changes in the foreign currency assets held by the Reserve Bank of India (RBI) and also in Special Drawing Rights (SDR) balances.
Overall the BoP account can be a surplus or a deficit. If there is a deficit then it can be bridged by taking money from the Foreign Exchange (Forex) Account.